Memorandum by the Chief of the Division of Latin American Affairs (Wilson)

Mr. J. Lawrence Gilson, Chairman of the Bondholders Protective Committee for the External Bonds of the Republic of El Salvador, called on Mr. Welles; Mr. Wilson was present. Mr. Gilson stated that his Committee was concerned over the failure of Salvador to make any remittances so far this year under the temporary agreement for servicing the bonds. He said that the Committee expected that nothing would be received for the next few months and that by next May, when the payment on the coupons was due, no funds would be available.

Mr. Gilson said that he had carried on considerable correspondence with President Martínez and the Finance Minister of Salvador. The Salvadoran Government took the position that in view of the “trend of the times”, lack of funds on the part of the Government, onerous provisions of the loan contract, et cetera, interest on the bonds should be cut about fifty per cent. In this connection Mr. Gilson referred to an “understanding” reached by the Government of Salvador with the bankers at the time the loan was floated that if the Republic carried out its obligations under the contract over a period of eight or ten years, the bankers would endeavor to refund the outstanding balance and have the interest rate reduced. (So far as I know this is the first we have heard of such an “understanding”, and as Salvador met her obligations from the time of the loan in 1922 down to February 1932, it may be that President Martínez is seeking some relief on the basis of this arrangement.)

[Page 267]

Mr. Gilson referred to the defaults which took place in February 1932 and said that he considered the Department’s position as “entirely correct” in declining to take up with Salvador, as provided in the loan contract, the question of a collectorship of customs, in view of the fact that there was no recognized government to deal with. Mr. Gilson referred to the fact that the situation was perhaps different now that we had recognized the Martínez government, but he made no request for any action looking to the establishment of a collectorship; on the contrary, he said that in his view he did not think it necessary to have a customs collectorship installed in Salvador since the Government had ample funds to pay on the basis of the present temporary agreement, and the bondholders would be willing to agree to an extension of this temporary agreement on reasonable terms. Mr. Gilson said that the purpose of his visit was to request the Department to instruct Dr. Corrigan, the new Minister, to say to the Salvadoran Government on his arrival that we felt that Salvador should continue its payments under the terms of the temporary agreement.

Mr. Welles said that this was the first information we had received that the remittances were not being made currently under the temporary arrangement. He said that we would instruct the Chargé d’Affaires at San Salvador to look into the situation and give us full information. Mr. Gilson said that he would be glad to send a memorandum to the Department giving all the information which his Committee possessed, and which we could send to the Chargé d’Affaires for his information. Mr. Welles suggested that Mr. Gilson get in touch with the Foreign Bondholders Protective Council, since this Salvadoran situation would fall within the field of the Council. Mr. Gilson said that his Committee was a going concern, that it had taken effective action in behalf of the holders of Salvadoran bonds, and that he was not sure there was anything the Foreign Bondholders Protective Council could do in the matter, but that he would be glad to get in touch with that organization and talk over the situation.

During the conversation Mr. Gilson mentioned that the Committee had had some difficulties with the Salvadoran Government over the question of payment of the expenses of the Committee, particularly legal expenses, which Mr. Gilson said had been heavy. The Salvadoran Government had refused to contribute to the Committee’s expenses, which necessarily had become a chargé on the bondholders. Mr. Gilson said the bondholders had “agreed” that 15% of the coupons should be deducted for the Committee’s expenses; he mentioned that the members of the Committee received remuneration in the sum of $3,000 annually each.

Edwin C. Wilson